Small businesses need to comply with new overtime rules

JOYCE M. ROSENBERGAP Business Writer

Published Saturday, August 28, 2004

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NEW YORK -- Overtime has suddenly become a confusing proposition for some small business owners.

New government rules that took effect Aug. 23 change the criteria under which employees must be paid overtime. That means company owners need to look at all of their employees and determine whether each should now be receiving overtime -- or might now be exempt from overtime.

Generally, under the new rules, the great majority of employees who earn less than $455 a week, or $23,660 a year, automatically qualify for overtime. Those who earn $100,000 generally do not have to be paid overtime.

For the many employees whose pay falls between those levels, owners will have to do an analysis of their jobs to determine whether they can be exempted from the rules. Basically, only those whose jobs can be classified as executive, administrative, professional or in an outside sales capacity are exempted. So are some computer employees.

Those are the basics. Owners will need to look at the rules, and also need to look at the many exceptions, not just to job classifications, but also to salary requirements.

The Labor Department's Web site at www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm has explanations of the rules, including a Power Point presentation with an overview, and what it calls "fact sheets" that go into more detail. The site contains definitions of what factors go into classifying an employee as executive, administrative, professional or an outside salesperson.

For example, the site describes an administrative job as follows:

"The employee's primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and

"The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance."

It sounds straightforward, but human resources professionals warn that doing an analysis of employees' jobs and salaries can be tricky.

"There are some gray areas -- it's not so cut and dried," said Rob Wilson, president of Employco Group, a Chicago-based company that handles payroll and benefits for small businesses. "It's not as easy as, just look at salary."

For example, there are situations under which an employer makes deductions from a worker's pay, say, for lateness. That might at the end of the year have an impact on whether an employee should be making overtime. But, an employer must also have given workers notice of the company policy on docking their pay.

Another example: If you have an employee whose salary level is set at over $100,000 but he or she doesn't work a full year, you can pro-rate the salary and not be required to pay overtime even though the worker took home less than $100,000.

And another: Let's say one of your employees directly supervises others only while you're on vacation. That employee isn't necessarily exempt from overtime because he or she performed some executive tasks while you were away.

As you go through the analysis, you need to remember that it's not your perception of your workers' jobs and pay that counts here, it's the government's.

For example, "you can't just call someone a manager," said Paul Sarvadi, CEO of Adminstaff, a Houston-based human resources firm, referring to the executive classification. "A manager has to oversee two or more people, and have the authority to hire or fire."

The rules specifically mention certain occupations as being exempt from overtime -- for example, insurance adjusters. But even in such cases, an employee's salary and job must fit the government's regulations. An insurance adjuster who earns less than $455 a week still has to be paid overtime.

Human resources professionals say the new rules have come as a surprise to many. As Wilson put it: "Most small business owners didn't know it was coming and don't even know it's in effect today."

Technically, companies need to be in compliance already with the new rules, and the Labor Department does audit some firms to see if they are following government pay regulations. But Wilson predicted there would be a grace period of a couple of quarters before the department imposes any penalties on businesses that are not complying.

Sarvadi said the best protection against penalties is to start evaluating your entire payroll.